It’s natural to want to save tax on the money your business makes. Tax planning can identify the best opportunities to reduce taxable income and the tax rates that apply so that you pay less tax.
Effective tax planning is the best way to reduce tax liabilities. That means planning well in advance, looking for opportunities to save tax from initial business start up through to eventual exit. It also means looking at the whole picture, to see how you can pay less tax both within the business, on your personal income and in terms of potential inheritance tax.
The Tax Donut mainly covers business tax. For advice on personal tax, see our section on Personal tax planning. If you'd like to find out about Inheritance Tax and how to minimise it, see our article on Inheritance tax planning on the Law Donut.
However, saving tax isn’t the whole story: it’s important not to get carried away. Start with your overall business and personal objectives, and then look for opportunities to pay less tax — not the other way round.
The simplest way to save tax is to ensure you are taking full advantage of tax allowances and reliefs. Using an appropriate level of debt financing allows you to save tax by setting interest payments against taxable profits. You may be able to reduce tax bills significantly by making sure you claim all your business mileage, or taking advantage of research and development tax credits.
You can save tax by using the right business structure, whether you are a business start up or need to change the way your existing business has been set up. That should include thinking about the best way for the business to hold any assets (such as property) in order to reduce tax bills.
You’ll pay less tax if you can extract cash from the business in the most tax-efficient way. With relatively low capital gains tax rates and generous Entrepreneurs’ relief, converting income into capital gains can substantially reduce tax bills. You may also save tax by taking payments as dividends rather than salary, or taking advantage of tax relief on pension contributions.
There’s a whole range of simple ways you may be able to reduce tax.
You may be able to reduce tax bills significantly by employing your spouse or transferring assets. Looking at the whole family’s tax position and long-term plans is a key part of personal tax planning to reduce tax liabilities.
Other ways to save tax can include:
Opportunities to save tax increase the more complex your business is. The larger the amounts of money involved, the more cost-effective it can be to develop strategies to reduce tax liabilities.
For more information on reducing your business tax, see:
If you would like further information on reducing your personal tax, see: